Overview: Hope that the geopolitical tensions in
Eastern Europe are de-escalating is underpinning risk appetites. The
large bourses in the Asia Pacific region but China were all up more than 1% and
Europe's Stoxx 600 gapped higher, but has come back to close the gap, with communications and financial sectors the largest drags. US futures have softened over the past couple of hours. The 10-year
Treasury yield is hovering around 2.04%, while European yields are a little softer. In the foreign exchange market, the risk-on means the
dollar, yen, and Swiss franc are underperforming, while the Canadian and Australian dollars are leading the advance.
Most emerging market currencies are firmer, and the JP Morgan Emerging Market
Currency Index is edging higher for the third consecutive session. Gold
and oil are stabilizing after yesterday's downside reversals. After
dipping below $1845 yesterday, the yellow metal is approaching $1860.
March WTI is recovering from yesterday's $90.65 low to resurface above
$93.00. API estimated that US crude inventories fell by 1.1 mln barrels and the drawdown at Cushing was more than twice as much. US natural gas prices are higher for a third session and around
13% for the week. Europe's benchmark has steadied after collapsing 16%
yesterday. Iron ore bounced almost 3.5% to snap an 11% slide over the past
three sessions, while copper is edging higher.
Asia Pacific
While many countries are
combatting price pressures, China is moving in the opposite
direction. Falling
food prices helped the January CPI slow to 0.9% year-over-year from 1.5%.
Pork prices fell by more than 40% year-over-year and fresh vegetable prices
dropped 4.1%. Excluding food and energy prices, the core CPI was
unchanged at 1.2% year-over-year. Falling coal, steel, and other
industrial goods prices say the PPI eased from 10.3% at the end of last year to
9.1% in January. Both the price gauges were lower than expected and
underscore the scope for further official support. Many expect rate cuts and
a reduction in required reserves to be delivered with Q2 a favorite
timeframe.
The Bank of Japan conducted
its normally scheduled bond buying operation today. The offer-to-cover rose to over 5x,
the highest since last October, reflecting the greater willingness to sell the
bonds to the BOJ. There may have been some extra interest
to sell 20-year bonds ahead of tomorrow's auction. BOJ Governor Kuroda
was clear. The offer to buy unlimited amounts of 10-year bonds to defend
the yield-curve-control cap of 0.25% can be made again. The BOJ has no
intention to abandon it or widen the band for the 10-year yield. The IMF
has previously suggested targeting a short-term rate, but Kuroda showed no
interest. While a strong reception at tomorrow's auction may buy some
time, the pressures emanating from the rise in global rates suggests a running
battle with the BOJ will continue.
The US dollar has been
confined to about a 20-pip range above JPY115.60. It is too narrow of a
range to persist.
The upside looks blocked around JPY116.00 and is reinforced by the expiration
of a nearly $1 bln option there today. On the downside, the
JPY115.30-JPY115.40 may limit a pullback. The Australian dollar
tested the $0.7185 area, the high before the weekend and US warning that a
Russian invasion of Ukraine could happen any day. This
area corresponds to the (61.8%) retracement objective of the slide from last
week's high set near $0.7250. It appears to have stalled there and a test
of nearby support in the $0.7140-$0.7150 area appears likely ahead of the jobs
report first things tomorrow in Australia. The US dollar fell by a
little more than 0.25% against the Chinese yuan yesterday, the most in two
months, and slipped a little further today. The market may have
been encouraged by the PBOC's dollar reference rate, which for the second
consecutive session was slightly below market expectations (of the median
forecast in the Bloomberg survey). Today's reference rate was set at
CNY6.3463 vs. expectations for CNY6.3465.
Europe
Understandably, the focus is on geopolitics and monetary policy, but the eurozone trade balance is at an
important junction. Yesterday, the EMU reported its largest monthly trade deficit (9.7
bln euros) in 19-years, mostly due to the surge in the cost of energy.
For last year as a whole, it recorded an average monthly surplus of about 10.2
bln euros, down from 18.7 bln in 2020 and 16.5 bln average in 2019. Last year's
average was the smallest since 2012.
After the four largest EMU
members report larger than expected declines in December industrial output,
the median forecast in Bloomberg's survey for a 0.3% increase seemed wide of
the mark. Consider
that German output fell by 0.3% (median forecast 0.5%), French output fell by
0.2% (median forecast 0.5%), and Italy's fall by 1.0%, which was only slightly
more than expected. Spain was the biggest disappointment. It
collapsed by 2.6% while the median forecasted a 0.5% decline.
Nevertheless, the Eurostat reported a 1.2% jump in December industrial output
and appears to use different national figures.
UK January inflation gauges
were slightly firmer than expected. CPIH, which includes owner equivalent housing costs edged
up to 4.9% from a year ago. It was at 4.8% in December. The month-over-month
decline in CPI of 0.1% was slightly less than expected. The core measure rose
4.4% after a 4.2% pace at the end of last year. Output producer
prices accelerated to 9.9% from 9.3%, dashing forecasts of a decline (to
9.1%). Input prices rose 13.6% from a year ago. This has also been
a quickening if not for the upward revision of the December series to 13.8%
from 13.5%. Today's inflation report will not change many minds about the
outlook for next month's meeting. The swaps market continues to show a
better than even chance of a 50 bp rate hike on March 17.
The euro extended its
recovery to $1.1395 in late Asian turnover today. Recall that the geopolitics and
widening rate differential had pushed it to about $1.1280 at the start of the
week. The upside looks blocked at $1.1400 by a one-billion-euro option
that expires today and another a little larger at $1.1425. Initial
support is seen in the $1.1340-$1.1350 area. Below there, support may be
near $1.1320. Sterling remains mired in a $1.35-$1.36 range. It
briefly slipped to below $1.3490 on an intrasession basis yesterday but quickly
rebounded. It has not settled outside this range this month.
America
After the recent price data,
the US economic news turns to the real sector today with consumption and
production news. Helped
by a jump in prices and auto sales, retail sales are expected to have recouped
December's 1.9% drop. Auto and gasoline likely accounted for around half
the projected increase. The core measure, which excludes autos, gasoline,
building materials, and food services are expected to have risen by 1.4%, the
median forecast in Bloomberg's survey. After dropping 3.1% in December,
it may be a little disappointing. Next week, the more comprehensive consumption
expenditures will be reported. Like the headline retail sales, the PCE is
expected to fully recover the 0.6% decline at the end of last year.
Industrial output is
expected to have risen by 0.5% last month. It fell by 0.1% in December. However, parts of
manufacturing remain disrupted and factory output is forecast to have risen by
0.2% after falling by 0.3%. Perhaps, an under-appreciated component in
industrial output is the surge in shale output from the Permian Basin.
It hit a new record high for the third consecutive month and was above 5 mln
barrels a day for the first time since 2007 when the time series began.
America's seven major shale areas are ramping up output and is expected to
reach 8.7 mln barrels a day next month. That said, there are two
medium-term challenges that ought to be monitored. First, output per well
is falling. It is now back to August 2020 levels. This means more
wells are needed for the same level of output. Second, the inventory left
in the ground as in drilled but not completed wells has been trending lower and
is now the lowest since 2014.
Late in the session, the
FOMC minutes from last month's meeting will be released. Recall the statement was not as
hawkish as Chair Powell comments. Powell sought maximum flexibility and
the market, with the help of some Fed officials (see Bullard) and the jump in
CPI, read into that flexibility a sign of more aggressive monetary
policy. On the eve of Powell's press conference, the Fed funds futures
had discounted around a 50% chance of a March hike and almost four hikes this
year. Now the Fed funds market is discounting almost a 2/3 probability of
a 50 bp hike in March and is divided between six and seven hikes this
year. The swaps market is pricing in two hikes next year and a cut in
2024.
Canada reports January CPI
figures. It appears
that after the US reported a stronger than expected increase, some economists
tweaked their Canadian forecasts higher. In January 2021, Canada's CPI
rose by 0.6%. The median forecast (Bloomberg survey) now looks for a 0.6%
increase last month. This will keep the year-over-year rate steady at
4.8%. The underlying measures may also be broadly stable. Note that
last February through May, Canada's CPI rose by 0.5% each month. Still,
it may not impact expectations for monetary policy. The swaps market has
nearly 175 bp of tightening priced in for this year--seven hikes. The market
sees a terminal rate of about 2.5%, which Bank of Canada Governor Macklem says
may be higher.
The upper end of the US dollar's range against the Canadian dollar held earlier this week near CAD1.28. The greenback is being pushed lower now and is back near the pre-weekend/pre-US warning low (~CAD1.2670). The lower end of the range is around CAD1.2650-CAD1.2660. Last week, there was an intrasession spike to almost CAD1.2635. However, the intrasession momentum indicators are stretched, warning of the risk that the greenback bounces in early North American turnover. The CAD1.2700-CAD1.2720 may serve as a nearby cap. The US dollar remains soft against the Mexican peso. The deputy governor of the central bank made it seem as if the Fed delivers a 50 bp hike by mid-March, it would be matched by Banxico at its meeting on March 24. The greenback has been testing the 200-day moving average, which comes in today near MXN20.34. Yesterday's bounce off it has been particularly shallow, suggesting that the bids are being absorbed. A break would target this year's low around MXN20.28. Below there, the greenback could fall toward MXN20.10-MXN20.15.
Disclaimer
Reviewed by Marc Chandler
on
February 16, 2022
Rating:
